How to Change Your Corporation’s Stock Par Value

Laws and regulations require companies to set this amount in the articles of incorporation. The par value of a bond is its face value, i.e. the principal the issuer is obligated to repay at the end of the bond’s term. The coupon rate earned by a bondholder is calculated as a percentage of the face (par) value. On the other hand, if the market price of the stock falls below the par value, the company may be liable to shareholders for the difference. Most companies opt to set a minimum par value for their stock shares to circumvent this scenario.

Similar to the coupon rate and par value of bonds, corporations issue preferred stock with a dividend rate calculated as a percentage of the face value. For example, if company XYZ issues 1,000 shares of stock with a par value of $50, then the minimum amount of equity that should be generated by the sale of those shares is $50,000. Since the market value of the stock has virtually nothing to do with par value, investors may buy the stock on the open market for considerably less than $50. If all 1,000 shares are purchased below par, say for $30, the company will generate only $30,000 in equity.

Par value is the value of a bond or share of stock as shown on the bond or stock certificate. Unlike the market value, the par values of stocks and bonds don’t change. Par value has different implications depending on whether it’s for a bond or stock.

1. For example, a bond price of 95 means the bond is priced at 95% of its par value.
2. The par value of a common share is an arbitrary value assigned to shares to fulfill state requirements.
3. If market interest rates fall to 3%, the value of the bond will rise and trade above par since the 4% coupon rate is more attractive than 3%.
4. On top of that, the stock certificates companies issue for these shares do not contain a par value.
5. The par value is the stated value per share, representing the “floor” price share value below which future shares cannot be issued.

This term is vital for most small business owners to understand before incorporation. Companies can issue shares without worrying about the minimum worth through this process. The no-par value stock may be an option for companies operating in those areas. In essence, the no-par value stock refers to shares that do not have a par or face value. As mentioned above, companies must set a par value for their shares in some jurisdictions.

Par Value Stock vs. No-Par Value Stock Example

On the other hand, a bond that is trading below par is on a discount trade, has a lower interest rate than the current market and it is sold at a lower price. A bond’s par value is the dollar amount indicated on the certificate, wherein the calculation of interest and the actual amount to be paid to lenders at maturity date is set. A share of stock’s par value is the minimum contribution amount made by investors to purchase one share at the time of issue.

Why Par Value Is Important for Investors

Thus, a bond with a par value of $100 that is purchased for $80 in the secondary market will yield a 25% return at maturity. Shares can be issued below par value, though doing so would be unfavorable for the issuing company. The company would have a per-share liability to shareholders for the difference between the par value of the stock and the issuance price. The par value of a stock may have become a historical oddity, but the same is not true for bonds.

Overall, the par value of shares is a part of the articles of association that companies formulate at incorporation. In some cases, setting this value is mandatory per laws and regulations. All of these factors play a crucial role in setting the par value of shares. Through these, companies can achieve an optimal first day of trading.

Stockholders’ equity is most simply calculated as a company’s total assets minus its total liabilities. Another calculation is as the value of the shares held or retained by the company and the earnings that the company keeps minus Treasury shares. Stockholders’ equity includes paid-in capital, retained, par value of common stock, and par value of preferred stock. Therefore, shareholders’ equity does not accurately reflect the market value of the company and is less important in the calculation of stockholders’ equity.

Par Value vs. Market Value FAQs

Before its maturity date, the market value of the bond fluctuates in the secondary market, as bond traders chase issues that offer a better return. However, when the bond reaches its maturity date, its market value will be the same as its par value. Even though par value may not be the price you pay for a security, it’s still https://simple-accounting.org/ important to be aware of as it may impact the amount of interest or dividend payments you receive. The terms “par value” and “face value” are interchangeable and refer to the stated value of a financial instrument at the time it is issued. In some instances, companies may not be mandatory to set the par value of shares.

Par Value, Market Value, and Stockholder Equity

The issuer promises to repay your initial investment—known as the principal—once the term is over, as well as pay you a set rate of interest over the life of the bond. Companies issue shares of stock to raise equity, and those that issue par value stocks often do at a value inconsistent with the actual market value. This adjustment allows companies to minimize their and the shareholders’ contractual obligations, as par value carries a binding contract between an organization and its shareholders. In other states, if you don’t list par value for your shares on your incorporation docs, your filing will be rejected. Sometimes the state will just go ahead and assign you a value if you don’t list one. Rhode Island, for instance, will assign a value of $0.01 per share.

The par value of a security is the original face value when it is issued. While bonds, common stock and preferred stock all carry a par value, it works differently for each type of security. Par value is set by the issuer and remains fixed for the life of a security—unlike market value, which fluctuates as a stock or bond changes hands on the secondary market. An investor landlord tax guide can identify no-par stocks on stock certificates as they will have “no par value” printed on them. The par value of a company’s stock can be found in the Shareholders’ Equity section of the balance sheet. Par value, also known as nominal or original value, is the face value of a bond or the value of a stock certificate, as stated in the corporate charter.

In the case of common stock the par value per share is usually a very small amount such as $0.10 or $0.01 and it has no connection to the market value of the share of stock. The par value is sometimes referred to as the common stock’s legal capital. When a corporation’s common or preferred stock has a par value, corporation’s balance sheet will report the total par value of the shares issued for each class of stock. This will be shown as a separate amount in the paid-in capital or contributed capital section of stockholders’ equity. The par value of stock has no relation to market value and, as a concept, is somewhat archaic.[when?

This allowance has waned the significance of par value for companies. Par can also refer to a bond’s original issue value or its value upon redemption at maturity. Practically, the par value has nearly zero impact on the current market value of the company’s shares. Conversely, if the prevailing interest rates are high, more bonds will trade at a discount. In general, a greater proportion of bonds usually trade above par throughout declining interest rate environments. The par value, a term often used interchangeably with the face value (FV), is the nominal value of a share, bond, or other related securities on their date of issuance.

Notably, par value for a bond is different, referring to its face value, or full value at maturity.

Therefore, the company will not have a future obligation to shareholders should its stock price decline. A share of stock in a company may have a par value or no-par value. These categories are both pretty much a historical oddity and have no relevance to the stock’s price in the market. This takes the burden of research off of you and makes individual par values and interest rates less relevant as you benefit from the overall growth of a whole sector of stocks or bonds. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.